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NEW YORK — Wall Street rallied strongly for a second session Thursday, as earnings from Bear Stearns and mild economic data helped stocks regain their footing after several weeks of hefty losses. The Dow Jones industrial average surged 198 points to surpass the closely-watched 11,000 level.

“The reason [the stock market is] up isn’t so much that [Bernanke] said anything, it’s what he didn’t say,” said Jim Paulsen, chief investment strategist with Wells Capital Management in Minneapolis, Minnesota. “Leading up to this, people thought he might be more hawkish,” given recent data showing an up tick in inflation, Paulsen added.

Thursday’s rally marked the second day of big gains on Wall Street, which has seen the Dow jump 309 points and post its biggest two-day rally since April 2003. A month of selling had pulled the Dow down more than 8 percent, as investors dealt with unease over inflation and the direction of interest rates. Last week, Wall Street chalked up
its worst week of losses in more than a year
.

Contributing to the market’s gains was
a report on nationwide industrial output
, which dipped unexpectedly last month, bolstering hopes that a weakening economy could keep the Fed from raising rates much higher. However, worries about an economic plunge were countered by a stronger-than-forecast rise in New York-area manufacturing and a modest slide in Philadelphia-area activity.

Despite recent signs of a slowing economy, analysts say inflationary pressures remain a risk and that higher interest rates could put a serious dent in economic growth. The Fed has said it would sacrifice growth to keep prices from rising, and the futures market has fully priced in an interest rate hike at the Fed’s next policy meeting on June 28-29.

“This looks mostly like a continued part of the rebound from the big sell-off,” said Ed Peters, chief investment officer at PanAgora Asset Management. He noted that the market’s two-day rally may have been driven by short sellers buying stocks to cover their positions following weeks of declines.

The Dow Jones industrial average finished Thursday up 198.27 points, or 1.83 percent, closing above the 11,000 mark for the first time since June 6. After shedding 186 points on Monday and Tuesday to fall into the red for the first time this year, the Dow is now back in positive territory for 2006.

The broader Standard & Poor’s 500-stock index jumped 26.12 points, or 2.12 percent, Thursday, while the Nasdaq composite index surged 58.15 points, or 2.79 percent, registering its biggest one-day percentage gain in more than two years. The technology-rich index remains in negative territory for the year.

Bonds slumped as stock prices rose.
Crude oil futures saw another day of gains
after the government reported a larger-than-expected drop in U.S. oil reserves as refineries stepped up output to meet summer gasoline demand. The U.S. dollar drifted slightly lower against the Japanese yen and was flat versus European currencies.

Despite two days of sturdy gains, some analysts were skeptical about whether Wall Street has finally reversed course. Stocks are expected to remain volatile until the Fed issues its opinion on the economy’s health at its late-June policy meeting.

“I think the market is trying to look beyond any day’s set of numbers and the next Fed comment and try to get a real assessment of how this inflection point in the economy is going to play out,” said Jerry Webman, chief economist of Oppenheimer Funds. “The crosswinds are blowing in different directions — the question is how far they’re going to push us.”

In economic news, the Fed said May industrial production fell 0.1 percent, below estimates for a 0.2 percent rise and down sharply from a 0.8 percent jump the month before. The central bank also said capacity utilization dipped slightly to 81.7 percent.

Other reports showed mixed readings on regional manufacturing in June. The Federal Reserve Bank of New York’s Empire State index surged to 29 from 12.9 the month before, while the Federal Reserve Bank of Philadelphia said manufacturing activity slowed to 13.1 from 14.4 in May.

In corporate news, shares of Microsoft slipped in after-hours trading as the software giant said co-founder and Chairman Bill Gates
plans to step away from day-to-day duties by July 2008
to focus on charitable work at his foundation. (MSNBC.com is a joint venture of Microsoft and NBC Universal News.)